Defined benefit pensions 'heading towards extinction'

Wednesday 1 September 2010 12:26 BST

Companies are drastically cutting back on the contributions they make to their defined benefit pensions when they review the schemes, research indicated today.

Just under half of companies have made changes to their defined benefit scheme, including final salary pensions, in the past two years, 52% of which have closed the schemes to both new and existing members, according to consulting firm Mercer.

A further 25% have increased the contributions members have to pay, while 11% have closed the schemes to new entrants.

But while firms are increasing the amount their staff have to pay into the schemes, they are often reducing the contributions they themselves make.

The group found that where companies had made changes to benefit provisions, the average contribution they paid had fallen from 17% to 11.3%.

Other changes made include reducing the rate at which pensions increase, switching from a final salary to a career average scheme, reducing the rate at which people accrued benefits and increasing the scheme's retirement age.

Mercer said the evolution of the defined benefit scheme looked set to continue, with a third of companies saying they were thinking of making changes to their pension, three-quarters of which were considering closing the scheme to future accrual.

Chris Sheppard, head of Mercer's scheme design group, said: "This is a story of evolution."The defined benefit plan as we have known it is heading towards extinction but new species are appearing as companies try to adapt and preserve what is a very highly-valued employee benefit and staff retention tool.

"A notable change has been the drop in average size of employer contribution. This reduces the cost of schemes.

"However, with employee contribution rates broadly the same, less company contribution has a detrimental impact on an employee's retirement, so good member communication is vital."